January 08, 2013

John Quiggin on the (Failed) State of Macroeconomics

Is there a consensus? Clearly there was a consensus as of early 2008…. Everyone agreed that the core business of macroeconomic management should be handled by central banks using interest rate adjustments to meet inflation targets. In the background, central banks were assumed to use a Taylor rule to keep both inflation rates and the growth rate of output near their target levels. There was no role for active fiscal policy such as stimulus to counter recessions, but it was generally assumed that, with stable policy settings, fiscal policy would have some automatic stabilizing effects…. It was generally agreed that this approach to macroeconomic policy, combined with financial deregulation had produced a ‘Great Moderation’ in the volatility of economic activity>This broad consensus was destroyed by the Global Financial Crisis and the Great Recession, but it wasn’t replaced by anything resembling a real debate. Rather, different groups have gone off in different directions. Academic macro went on more or less as before…. Central banks have, in effect, treated the entire period since 2008 as a Schmittian “state of exception”, during which normal rules cease to apply. They have used the crisis to push governments to adopt “reforms” favored by the financial sector, such as cutting welfare benefits and other areas of public expenditure. But their central concern has been to restore the status quo ante, and the exclusive primacy of monetary policy, as soon as possible. From the central bank viewpoint, the restoration of low and stable inflation after the shocks of the 1970s is their crowning achievement and one to be maintained at any cost….

What debate is happening largely involves people like Krugman (and, much less notably, me) arguing against his Chicago opponents (Cochrane, Fama, Mulligan) who are mostly not macro specialists and therefore (as Williamson points out in his piece) “not really up on what is going on in macroeconomic research” but who do have something to say about macro-economic policy…. [T]his argument is, just like most things in the US today, part of the general war between parallel left and right universes, encompassing issues like climate change, tobacco, gun control and so on. There’s no way in which New Classical or RBC models can explain a sustained depression occurring in many countries at once, and they don’t even try.

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Is there a consensus? Clearly there was a consensus as of early 2008…. Everyone agreed that the core business of macroeconomic management should be handled by central banks using interest rate adjustments to meet inflation targets. In the background, central banks were assumed to use a Taylor rule to keep both inflation rates and the growth rate of output near their target levels. There was no role for active fiscal policy such as stimulus to counter recessions, but it was generally assumed that, with stable policy settings, fiscal policy would have some automatic stabilizing effects…. It was generally agreed that this approach to macroeconomic policy, combined with financial deregulation had produced a ‘Great Moderation’ in the volatility of economic activity>This broad consensus was destroyed by the Global Financial Crisis and the Great Recession, but it wasn’t replaced by anything resembling a real debate. Rather, different groups have gone off in different directions. Academic macro went on more or less as before…. Central banks have, in effect, treated the entire period since 2008 as a Schmittian “state of exception”, during which normal rules cease to apply. They have used the crisis to push governments to adopt “reforms” favored by the financial sector, such as cutting welfare benefits and other areas of public expenditure. But their central concern has been to restore the status quo ante, and the exclusive primacy of monetary policy, as soon as possible. From the central bank viewpoint, the restoration of low and stable inflation after the shocks of the 1970s is their crowning achievement and one to be maintained at any cost….